AMENDED AND RESTATED STOCKHOLDERS AGREEMENT


     THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT among FRISBY TECHNOLOGIES,
INC., a Delaware  corporation (the "Company"),  JEFFRY D. FRISBY ("J.  Frisby"),
GREGORY S.  FRISBY ("G.  Frisby")(each  of J.  Frisby and G.  Frisby,  a "Frisby
Stockholder" and, collectively, the "Frisby Stockholders"), and MUSI INVESTMENTS
S.A., a Luxemburg societe anonyme ("MUSI") (each of the Frisby  Stockholders and
MUSI, a "Stockholder" and, collectively, the "Stockholders"),  is made as of the
31st  day of  March,  1998,  for the  purpose  of  amending  and  restating  the
Stockholders Agreement among the Company and the Stockholders dated December 29,
1997 (the "Original Agreement").

                                    RECITALS

     A. J.  Frisby  owns  1,419,643  shares  of Common  Stock,  G.  Frisby  owns
1,419,643  shares of Common Stock and MUSI owns  441,327  shares of Common Stock
and 587,500 shares of Convertible  Preferred Stock, which shares,  collectively,
constitute  100%  percent  of the  outstanding  capital  stock  of  the  Company
immediately prior to the Initial Public Offering (as hereinafter defined).

     B. The Company  and the  Stockholders  believe it would be in their  mutual
best interest to ensure a degree of  continuity  of management  and ownership of
and certain  rights in respect of the Company by imposing  certain  restrictions
and obligations on the ownership, retention and disposition of the capital stock
of the Company.

     C. The parties hereby fully amend and restate the Original  Agreement,  and
confirm that the  reference  to the  Stockholders  Agreement  in the  restricted
legend in Section 2.2 is deemed to be a reference to the Original Agreement.

<PAGE>

     NOW, THEREFORE, the parties hereto agree as follows:


                                 I. DEFINITIONS

     1.1. Definitions.

     (a)  Capitalized  terms used herein which are not otherwise  defined herein
shall have the meaning ascribed to them in the Purchase  Agreement.  In addition
to the terms defined  elsewhere  herein,  the following terms have the following
meanings when used herein with initial capital letters:

     "Agreement"  means this agreement,  as the same may be amended from time to
time.

     "Board of Directors" means the Board of Directors of the Company.

     "Closing Date" means December 29, 1997.

     "Commission" means the Securities and Exchange Commission.

     "Common Stock" means the common stock,  par value $0.001 per share,  of the
Company.

     "Convertible  Preferred Stock" means the convertible preferred stock of the
Company  as  more  particularly   described  in  that  certain   Certificate  of
Designation, attached as Exhibit A hereto.

     "Director" means a member of the Board of Directors.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     "Frisby   Permitted   Transferee"   means,   with  respect  to  any  Frisby
Stockholder,  (i) any spouse or lineal  descendant  of such Frisby  Stockholder,
(ii)  any  trust  (or  equivalent  estate  planning  entity)  where  all  of the
beneficial  interest is held by such Frisby Stockholder and/or his spouse and/or
lineal descendants,  or (iii) any other Frisby Stockholder;  provided,  however,
that each such transferee will be a Frisby Permitted  Transferee for purposes of
this Agreement only if such transferee shall have executed and delivered to each
of MUSI and the Company an instrument  reasonably  satisfactory to MUSI pursuant
to which  such  transferee  will have  agreed to be bound by all of the terms of
this Agreement applicable to its transferor.

     "Frisby  Stockholder  Group" means each of the Frisby  Stockholders  or any
Frisby Permitted Transferee.

     "Initial  Public  Offering"  means  the  first  Public  Offering  of equity
securities of the Company.

<PAGE>

     "Public  Offering" means any primary or secondary public offering of equity
securities of the Company pursuant to an effective  registration statement under
the Securities  Act,  other than pursuant to a registration  on Form S-4 or Form
S-8 or any successor or similar form.

     "Pro Rata" means, with respect to any offer including Securities,  an offer
based on the relative  percentages of Securities then held by all of the holders
of Securities to whom offer is made.

     "Purchase  Agreement" means the Purchase  Agreement dated as of the Closing
Date between the Company and MUSI.

     "Registrable  Securities" means shares of Common Stock;  provided that such
securities  will cease to be Registrable  Securities when and to the extent that
(i) a  registration  statement  relating  to such  securities  shall  have  been
declared  effective  by the  Commission  and such  securities  shall  have  been
disposed  of  pursuant  to such  effective  registration  statement,  (ii)  such
Registrable  Securities  have been  transferred  to a party in violation of this
Agreement,(iii)  such Registrable  Securities have ceased to be outstanding,  or
(iv) such Registrable  Securities are sold without registration pursuant to Rule
144.

     "Registration Expenses" means all (i) registration and filing fees with the
Commission,  (ii) fees and expenses of compliance with state  securities or blue
sky laws (including reasonable fees and disbursements of a qualified independent
underwriter, if any, counsel in connection therewith and the reasonable fees and
disbursements  of  counsel in  connection  with blue sky  qualifications  of the
Registrable Securities),  (iii) printing expenses, (iv) internal expenses of the
Company (including,  without  limitation,  all salaries and expenses of officers
and employees  performing legal or accounting duties),  (v) fees and expenses of
counsel  and  independent  public  accountants  for the  Company,  (vi) fees and
expenses of any additional  experts  retained by the Company in connection  with
such   registration,   (vii)  fees  and  expenses  of  listing  the  Registrable
Securities,  if any,  (viii) rating agency fees,  (ix) transfer  taxes,  and (x)
reasonable fees and expenses of one counsel for the selling Stockholders.

     "Rule  144" means Rule 144 under the  Securities  Act,  as such rule may be
amended from time to time.

     "Securities" means the Common Stock and Convertible Preferred Stock.

     "Third  Party"  means  a  prospective  purchaser  of the  Securities  in an
arm's-length  transaction where such purchaser is not the Company,  an Affiliate
of  the  Company  or an  Affiliate  of any  Stockholder  or a  Frisby  Permitted
Transferee.

<PAGE>

     "Transferee"  means  any  Person  to whom  any  Stockholder  Transfers  any
Securities (other than in a sale pursuant to an effective registration statement
or without registration  pursuant to Rule 144) in accordance with this Agreement
and who agrees to be bound by and to comply with all  applicable  provisions  of
this Agreement.

     "Underwriter"  means a  securities  dealer who  purchases  any  Registrable
Securities as a principal in connection with a distribution of such  Registrable
Securities and not as part of such dealer's market-making activities.

     (b) Except as otherwise  provided  herein,  any right or action that may be
taken  at the  election  of the  Frisby  Stockholder  Group  will be  taken by a
representative   of  the   Frisby   Stockholder   Group   (the   "Frisby   Group
Representative") on behalf thereof. The initial Frisby Group Representative will
be G. Frisby.  Upon the death or permanent  disability of G. Frisby,  the Frisby
Stockholder  Group may designate a successor  Frisby Group  Representative  upon
vote of the members  thereof  holding a majority of the Common Stock not held by
G. Frisby or his estate; provided,  however, that (i) if no such successor is so
designated within 30 calendar days from such death or permanent disability, such
successor will be a member of the Frisby  Stockholder  Group  designated by MUSI
and  (ii)  in  the  event  that  no  Person  is  acting  as  the  Frisby   Group
Representative  as of the time any action is otherwise to be taken  hereunder by
the Frisby Group Representative or the Frisby Stockholder Group, such action may
be taken on behalf of the entire Frisby  Stockholder  Group by written action or
consent of the holders of a majority of shares of Common  Stock then held by the
members  of the  Frisby  Stockholder  Group.  Any  change  in the  Frisby  Group
Representative will become effective upon notice in accordance with Section 6.3.

     (c) For purposes of this Agreement,  any action or consent  contemplated to
be taken or given by MUSI and its  permitted  Transferees  will be  effective if
taken or given, as the case may be, by MUSI or its permitted  Transferees  which
own the largest portion of the Securities owned by MUSI and all of its permitted
Transferees as of the relevant time.


<PAGE>

                         II. RIGHTS AND OBLIGATIONS WITH
                               RESPECT TO TRANSFER

     2.1. Transfers.  Until the fifth anniversary of the Closing Date, no Frisby
Stockholder  may  offer,  sell,  assign,  grant a  participation  in,  pledge or
otherwise transfer  ("Transfer") any interest in any of its Common Stock without
the prior  written  consent  of MUSI,  other  than (i) to any  Frisby  Permitted
Transferee,  (ii) as provided in Articles II or III of this Agreement,  or (iii)
in sales  made  pursuant  to an  effective  registration  statement  or  without
registration pursuant to Rule 144 after the Initial Public Offering.

     2.2. Restrictive Legend. (a) Each certificate representing Securities owned
by any  Stockholder  will  include  the  following  legend (in  addition to such
legends as may be appropriate under applicable securities laws):

     THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  ARE SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCKHOLDERS AGREEMENT, DATED AS OF
DECEMBER 29, 1997, AS FROM TIME TO TIME AMENDED, A COPY OF WHICH MAY BE OBTAINED
FROM FRISBY TECHNOLOGIES, INC.

     (b) Each  certificate  representing  Securities owned by any Stockholder or
any  Transferee  thereof  (other than shares that have been sold  pursuant to an
effective  registration statement under the Securities Act or in accordance with
Rule 144 under the  Securities  Act) will  (unless  otherwise  permitted  by the
provisions of Section 2.2(c)) include a legend substantially as follows:

     THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN  REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR ANY STATE SECURITIES LAWS. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.

     (c) Any Stockholder may, upon providing evidence (which, if required by the
Company,  may  include an opinion of  counsel)  reasonably  satisfactory  to the
Company, that such Securities either are not "restricted securities" (as defined
in Rule 144) or may be sold  pursuant to Rule 144(k),  exchange the  certificate
representing  such Securities for a new certificate  that does not bear a legend
relating to restrictions under the securities laws.

     2.3. Third Party Transfers.  (a) If any Stockholder desires to Transfer any
of its Securities (other than pursuant to a Public Offering) to a Third Party (a
"Selling Stockholder"), such Selling Stockholder may not effect such Transfer of
such  Securities  (the "Offered  Stock") to a Third Party (a "Third Party Sale")
unless such Stockholder complies with this Section 2.3.

     (b) Prior to consummating a Third Party Sale, the Selling  Stockholder will
deliver to each other  Stockholder (the  "Non-Offering  Stockholders") a written
notice (an "ROFO Offer  Notice")  specifying  (i) the  aggregate  amount of cash
consideration (the "Offer Price") for which the Selling Stockholder  proposed to
sell the Offered Stock in such proposed Third Party Sale,  (ii) the identity and
name of the purchaser,  and if applicable,  such purchaser's ultimate beneficial
owner(s),  in such Third Party Sale,  and (iii) all other material terms of such
proposed Third Party Sale. If a Non-Offering Stockholder delivers to the Selling
Stockholder a written notice (an  "Acceptance  Notice")  within 20 Business Days
following  the  delivery of the ROFO Offer  Notice  (such 20 Business Day period
being  referred  to herein as the "ROFO  Acceptance  Period")  stating  that the
Non-Offering Stockholder is willing to purchase all of the Offered Stock for the
Offer  Price and on the other terms set forth in the Offer  Notice,  the Selling
Stockholder  will sell all (but not less than all) of the Offered  Stock to such
Non-Offering  Stockholder and such  Non-Offering  Stockholder will purchase such
Offered  Stock from the  Selling  Stockholder,  on the terms and  subject to the
conditions  set  forth  below;   provided,   however,  that  if  more  than  one
Non-Offering  Stockholder  so notifies the Selling  Stockholder  within the ROFO
Acceptance  Period that it is willing to purchase  all of the Offered  Stock for
the Offer  Price and on the terms  set forth in the Offer  Notice,  the  Offered
Stock and the Offer Price will be allocated among such Non-Offered  Stockholders
(each, a "Purchasing  Stockholder")  proportionately based upon their respective
percentage ownership interest in the Company or as may otherwise be specified by
such Purchasing Stockholders.

<PAGE>

     (c) The  consummation  of any purchase of any Offered Stock by a Purchasing
Stockholder  pursuant to this  Section 2.3 (the "ROFO  Closing")  will occur not
earlier than 10 calendar  days nor later than 120 calendar  days  following  the
delivery of the  Acceptance  Notice (the  intervening  period being  referred to
herein as the "ROFO Closing Period") at the principal  executive  offices of the
Company.  At the ROFO Closing,  (i) the Selling  Stockholder will deliver to the
Purchasing  Stockholder one or more  certificates  evidencing all of the Offered
Stock duly endorsed for transfer to the  Purchasing  Stockholder,  together with
such other duly executed  instruments or documents as may reasonably be required
to permit the Purchasing Stockholder to acquire the Offered Stock free and clear
of any  claims,  liens,  pledges,  options,  encumbrances,  security  interests,
commitments and other restrictions of any kind  (collectively,  "Encumbrances"),
except for Encumbrances  created by this Agreement,  federal or state securities
laws, the Purchasing  Stockholder or specified in the Offer Notice, and (ii) the
Purchasing  Stockholder will deliver to the Selling Stockholder by wire transfer
to an account  designated by the Selling  Stockholder  an amount in  immediately
available funds equal to the Offer Price. In the event that any Third Party Sale
provides  that a  portion  of the  Offer  Price is to be paid  over  time,  as a
condition  to the  obligation  of the  Selling  Stockholder  to sell the Offered
Stock,  the Purchasing  Stockholder  will provide the Selling  Stockholder  with
suitable collateral as security for such future payment obligations.

     (d) If no Acceptance  Notice  relating to a proposed Third Party Sale shall
have been  delivered to the Selling  Stockholder  prior to the expiration of the
ROFO  Acceptance  Period,  if  the  Non-Offering  Stockholders  shall  not  have
delivered  to the  Selling  Stockholder,  prior  to the  expiration  of the ROFO
Acceptance Period, written confirmation of the Non-Offering Stockholder's intent
not to purchase the Offered Shares ("Stockholder  Rejection Notice"),  or if the
ROFO Closing fails to occur prior to the  expiration of the ROFO Closing  Period
(unless  the  Purchasing  Stockholder  was ready,  willing and able prior to the
expiration  of the ROFO  Closing  Period to  consummate  the  transaction  to be
consummated by the Purchasing  Stockholder at the ROFO Closing or the Purchasing
Stockholder was not so ready,  willing and able to consummate the transaction to
be so consummated by the Purchasing  Stockholder at the ROFO Closing as a result
of the Selling  Stockholder's failure reasonably to cooperate in good faith with
the efforts of the Purchasing  Stockholder to consummate such transaction),  the
Selling  Stockholder  may consummate the proposed Third Party Sale in accordance
with this Section 2.3(d).

     (e) The Selling  Stockholder  may  consummate a Third Party Sale that it is
otherwise entitled to consummate pursuant to this Section 2.3(d) only:

     (i) during the 60 calendar day period  immediately  following the sooner to
occur of (x) the expiration of the ROFO Acceptance  Period (in the event that no
Acceptance Notice was timely delivered to the Selling  Stockholder),  or (y) the
Selling  Stockholder's  receipt of the  Stockholder  Rejection  Notice  from the
Non-Offering  Stockholder,  or the 60 calendar day period immediately  following
the  expiration  of the ROFO  Closing  Period (in the event  that an  Acceptance
Notice was timely  delivered  to the Selling  Stockholder  but the ROFO  Closing
failed to timely occur),

     (ii) at a price at least equal to the Offer Price, and

     (iii) upon  non-price  terms no less  favorable to the Selling  Stockholder
than those set forth in the Offer Notice.

     (f) This Section 2.3 shall,  with respect to MUSI,  terminate  and be of no
further force and effect upon  expiration  of the "lock-up"  period to which the
Stockholders  agree to be bound in connection  with the Initial Public  Offering
and, with respect to the Frisby Stockholder Group,  continue in effect after the
expiration of such "lock-up" until the fifth anniversary of the date hereof.

<PAGE>

     (g) Shares of  Securities  acquired  by a Third  Party  pursuant to a Third
Party Sale shall no longer subject to the restrictions contained in this Section
2.3.

     2.4. Improper  Transfer.  (a) Any attempt to Transfer any Securities not in
compliance with this Agreement will be null and void and neither the Company nor
any transfer agent of the Company will register,  or otherwise  recognize in the
Company's records,  any such improper  Transfer.  Any cost or loss incurred as a
result of any such  attempt to transfer  shall be borne by the  Stockholder  who
attempted such improper Transfer.

     (b)  No  Stockholder   will  enter  into  any   transaction  or  series  of
transactions  for the  purpose or with the effect of,  directly  or  indirectly,
denying  or  impairing  the  rights or  obligations  of any  Person  under  this
Agreement,  and any such  transaction  will be null and void and,  to the extent
that  such  transaction  requires  any  action  by the  Company,  it will not be
registered or otherwise recognized in the Company's records or otherwise.

     2.5. Transferees. Except as otherwise specifically provided herein, any and
all provisions of this Agreement which apply to the Stockholders will apply with
equal force to any Transferee.

                            III. REGISTRATION RIGHTS

     3.1.  MUSI  Demand  Registrations.  (a) At any time  and from  time to time
following the eighteen month  anniversary of the Initial Public  Offering,  MUSI
may make written  requests for  registration  under the Securities Act of all or
part of MUSI's Registrable Securities (a "MUSI Demand Registration");  provided,
however,  that  the  Company  will  not be  obliged  to  effect  a  MUSI  Demand
Registration  on more than two (2)  occasions.  Such  request  will  specify the
number of shares of  Registrable  Securities  proposed  to be sold and will also
specify the intended method of disposition thereof.

     (b) If MUSI so elects,  the  offering  of the MUSI  Registrable  Securities
pursuant to such MUSI Demand Registration will be in the form of an underwritten
offering.  MUSI will  select  the  managing  Underwriter(s)  and any  additional
participants in connection with the offering.

     (c) If, in connection with any MUSI Demand Registration, the Company or any
other Stockholder also proposes to sell securities and the managing  Underwriter
of an offering  described in this Section 3.1 advises the Company,  MUSI and the
other  Stockholders in writing that the success or pricing of the offering would
be materially  and adversely  affected by the inclusion of all of the securities
requested to be included, then the Company will include in such registration (i)
first, the Registrable  Securities MUSI proposes to offer for sale, which number
of securities will be reduced to the extent necessary to reduce the total amount
of securities to be included in the offering to the amount  recommended  by such
managing Underwriter,  (ii) second, the securities the Company proposes to offer
for sale,  which number of securities will be reduced to the extent necessary to
reduce the total  amount of  securities  to be included  in the  offering to the
amount recommended by such managing Underwriter and (iii) third, the Registrable
Securities  the other  Stockholders  propose to offer for sale and the  managing
Underwriter  recommends be included in such  offering,  allocated pro rata among
such Stockholders.

<PAGE>

     (d)  Notwithstanding  the foregoing  provisions of this Section 3.1, in the
event the Company receives notice of a MUSI Demand Registration, the Company may
elect  once,  and only  once,  by  written  notice to MUSI  within 20 days after
receipt of such notice,  to proceed with a registration  of Common Stock for the
Company's  account in lieu of proceeding with the MUSI Demand  Registration,  in
which case the  provisions of Section 3.2 (and not this Section 3.1) will apply.
If the Company  exercises the right  described in the preceding  sentence,  MUSI
will not be deemed (for purposes of determining the number of future MUSI Demand
Registrations  that may be demanded  under the terms of this  Agreement) to have
exercised the right to request a MUSI Demand Registration unless at least 50% of
the  Registrable  Securities  that MUSI desired to include in such  registration
were included pursuant to Section 3.2.

     (e)  Notwithstanding  any other provision hereof,  MUSI will not initiate a
demand registration unless it proposes to include therein Registrable Securities
which it believes in good faith to have a value of at least $500,000.

     3.2.  Piggy-Back  Registration.  (a)  If the  Company  proposes  to  file a
registration  statement  under the Securities Act with respect to an offering of
any shares of Common  Stock (i) for its own account  (other than a  registration
statement on Form S-4 or S-8 (or any substitute  form that may be adopted by the
Commission)) or (ii) for the account of any holders of its securities,  then the
Company  will give  written  notice of such  proposed  filing to the  holders of
Registrable  Securities  as  soon  as  practicable  (provided  that  holders  of
Registrable  Securities will be given such notice not less than 20 calendar days
prior to the  deadline  set by the Company for  electing to include  Registrable
Securities  in such  offering),  and such  notice  will offer such  holders  the
opportunity,  subject to the limitations provided in Section 3.2(b), to register
such number of shares of Registrable Securities as such Stockholders may request
on the same terms and  conditions as the  registration  of the Company's or such
other holders' securities.

     (b) Notwithstanding  anything contained herein, if the managing Underwriter
of an  underwritten  offering  under this  Section  3.3  advises  the Company in
writing  that the success or pricing of the  offering  would be  materially  and
adversely  affected by the  inclusion of all of the  securities  requested to be
included,  then the Company will  include in such  registration  (i) first,  the
securities the Company proposes to offer for sale and (ii) second, the number of
other  securities of the Company  (including,  without  limitation,  Registrable
Securities)  so  requested  to be included  which in the opinion of the managing
Underwriter can be sold, allocated pro rata among the Stockholders  proposing to
offer Registrable Securities for sale.

     (c)  A  request  by  MUSI  or  the  Frisby  Stockholder  Group  to  include
Registrable  Securities  in a proposed  underwritten  offering  pursuant to this
Section  3.2 will  not be  deemed  to be a  request  for a  demand  registration
pursuant to Section 3.1.


<PAGE>

                           IV. REGISTRATION PROCEDURES

     4.1.  Filings;  Information.   Whenever  MUSI  or  the  Frisby  Stockholder
Representative  (the  "Registering  Stockholder")  request that any  Registrable
Securities be registered  pursuant to Article III, the Company will use its best
efforts to effect the registration of such Registrable Securities as promptly as
is practicable, and in connection with any such request:

     (a) The Company will as expeditiously as possible prepare and file with the
Commission  a  registration  statement  on any form for which the  Company  then
qualifies and which counsel for the Company deems  appropriate and available for
the sale of the Registrable Securities to be registered thereunder in accordance
with the intended  method of distribution  thereof,  and use its best efforts to
cause such filed  registration  statement to become and remain  effective  for a
period  of not  less  than 90  days;  provided,  however,  that  if the  Company
furnishes to the Registering  Stockholder a certificate  signed by the Company's
Chief Executive  Officer,  President or any  Vice-President  stating that in his
good faith judgment it would be detrimental or otherwise  disadvantageous to the
Company or its  stockholders  for such a  registration  statement to be filed as
expeditiously  as  possible,  the Company will have a period of not more than 90
calendar days within which to file such registration statement measured from the
date of the  Company's  receipt of the  Registering  Stockholder's  request  for
registration in accordance with Article III.

     (b) The Company  will,  if  requested,  prior to filing  such  registration
statement or any amendment or  supplement  thereto,  furnish to the  Registering
Stockholder and each applicable  managing  Underwriter,  if any, copies thereof,
and thereafter furnish to the Registering Stockholder and each such Underwriter,
if any,  such number of copies of such  registration  statement,  amendment  and
supplement  thereto (in each case  including all exhibits  thereto and documents
incorporated  by  reference  therein)  and  the  prospectus   included  in  such
registration   statement   (including  each   preliminary   prospectus)  as  the
Registering Stockholder or each such Underwriter may reasonably request in order
to facilitate the sale of the Registrable Securities.

     (c) After the  filing  of the  registration  statement,  the  Company  will
promptly notify the Registering  Stockholder of any stop order issued or, to the
Company's  knowledge,  threatened  to be issued by the  Commission  and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.

     (d) The Company will  endeavor to qualify the  Registrable  Securities  for
offer  and  sale  under  such  other   securities  or  blue  sky  laws  of  such
jurisdictions  in the United States as the  Registering  Stockholder  reasonably
requests;  provided,  however,  that the  Company  will not be  required  to (i)
qualify  generally  to do  business  in any  jurisdiction  where  it  would  not
otherwise  be required  to qualify but for this  subsection  (d),  (ii)  subject
itself to taxation in any such jurisdiction, or (iii) consent to general service
of process in any such jurisdiction.

     (e) The Company will as promptly as is practicable  notify the  Registering
Stockholder  at  any  time  when  a  prospectus  relating  to  the  sale  of the
Registrable  Securities  is required by law to be delivered in  connection  with
sales by an Underwriter or dealer,  of the occurrence of any event requiring the
preparation  of a  supplement  or  amendment  to such  prospectus  so  that,  as
thereafter  delivered to the  purchasers of such  Registrable  Securities,  such
prospectus  will not contain an untrue  statement of a material  fact or omit to
state any material fact  required to be stated  therein or necessary to make the
statements  therein,  in the light of the  circumstances  under  which they were
made, not misleading and promptly make available to the Registering  Stockholder
and to the  Underwriters  any such  supplement  or  amendment.  The  Registering
Stockholder  agrees  that,  upon  receipt of any notice  from the Company of the
occurrence  of any event of the kind  described in the preceding  sentence,  the
Registering  Stockholder  will  forthwith  discontinue  the  offer  and  sale of
Registrable  Securities  pursuant to the  registration  statement  covering such
Registrable  Securities  until receipt by the  Registering  Stockholder  and the
Underwriters of the copies of such supplemented or amended prospectus and, if so
directed by the Company, the Registering Stockholder will deliver to the Company
all  copies,   other  than  permanent  file  copies  then  in  the   Registering
Stockholder's   possession,   of  the  most  recent  prospectus   covering  such
Registrable  Securities at the time of receipt of such notice.  In the event the
Company gives such notice,  the Company will extend the period during which such
registration statement will be contained effective as provided in Section 4.1(a)
by the  number of days  during  the period  from and  including  the date of the
giving of such notice to the date when the Company  will make  available  to the
Registering Stockholder such supplemented or amended prospectus.

<PAGE>

     (f)  The  Company  will  enter  into  customary  agreements  (including  an
underwriting  agreement  in customary  form) and take such other  actions as are
reasonably  required  in  order  to  expedite  or  facilitate  the  sale of such
Registrable Securities.

     (g) The Company will  furnish to the  Registering  Stockholder  and to each
Underwriter a signed  counterpart,  addressed to the Registering  Stockholder or
such  Underwriter,  of (i) an opinion or  opinions of counsel to the Company and
(ii) a comfort letter or comfort letters from the Company's  independent  public
accountants,  each in  customary  form and  covering  such  matters  of the type
customarily  covered by opinions or comfort letters,  as the case may be, as the
Registering Stockholder or the managing Underwriter may reasonably request.

     (h) The Company will make generally  available to its security holders,  as
soon as reasonably  practicable,  an earnings  statement covering a period of 12
months,   beginning  within  three  months  after  the  effective  date  of  the
registration statement,  which earnings statement will satisfy the provisions of
Section  11(a)  of the  Securities  Act and the  rules  and  regulations  of the
Commission thereunder.

     (i)  The  Company  will  use its  reasonable  efforts  to  cause  all  such
Registrable Securities to be listed on each securities exchange on which similar
securities  issued by the  Company  are then  listed or, if not so listed,  on a
national securities exchange.

     The Company may require the Registering  Stockholder promptly to furnish in
writing to the Company such information  regarding the Registering  Stockholder,
the plan of distribution of the Registrable  Securities and other information as
the  Company  may from  time to time  reasonably  request  or as may be  legally
required in connection with such registration.

     4.2.  Registration  Expenses.  Registration Expenses incurred in connection
with any registration  made or requested to be made pursuant to Article III will
be borne by the Company,  whether or not any such registration statement becomes
effective,   to  the  extent   permitted  by  applicable  law.  The  Registering
Stockholder will pay, on a pro rata basis, any underwriting  fees,  discounts or
commissions attributable to the sale of the Registrable Securities.

<PAGE>

     4.3.  Indemnification  by the Company.  The Company agrees to indemnify and
hold harmless each Stockholder  registering  shares pursuant to Article III, its
officers  and  directors,  and each  Person,  if any,  who  controls  each  such
Stockholder within the meaning of Section 15 of the Securities Act or Section 20
of the  Exchange  Act from and  against  any and all  losses,  claims,  damages,
liabilities  and  expenses  caused by any untrue  statement  or  alleged  untrue
statement  of a  material  fact  contained  in  any  registration  statement  or
prospectus relating to the Registrable Securities (as amended or supplemented if
the Company will have furnished any  amendments or  supplements  thereto) or any
preliminary  prospectus,  or caused by any omission or alleged omission to state
therein a material fact  required to be stated  therein or necessary to make the
statements  therein  not  misleading,  except  insofar as such  losses,  claims,
damages,  liabilities  or expenses  are caused by any such untrue  statement  or
omission  or  alleged  untrue  statement  or  omission  based  upon  information
furnished  in  writing  to the  Company  by or on  behalf  of  such  Stockholder
expressly  for use therein;  provided,  however,  that the  foregoing  indemnity
agreement  with  respect  to any  preliminary  prospectus  will not inure to the
benefit of any Stockholder if a copy of the current  prospectus was not provided
to the  applicable  purchaser by such  Stockholder  and such current copy of the
prospectus would have cured the defect giving rise to such loss, claim,  damage,
liability or expense.  The Company also agrees to indemnify any  Underwriters of
the  Registrable  Securities,  their  officers and directors and each Person who
controls  such  underwriters  on  substantially  the  same  basis as that of the
indemnification of the Stockholders provided in this Section 4.3.

     4.4.  Indemnification by Stockholders.  Any Stockholder  registering shares
pursuant to Article III agrees, severally but not jointly, to indemnify and hold
harmless the Company,  its officers and Directors  and each Person,  if any, who
controls the Company  within the meaning of either  Section 15 of the Securities
Act or  Section  20 of the  Exchange  Act to the same  extent  as the  foregoing
indemnity  from the  Company to such  Stockholder,  but only with  reference  to
information related to such Stockholder  furnished in writing by or on behalf of
such Stockholder  expressly for use in any registration  statement or prospectus
relating to the Registrable  Securities,  or any amendment or supplement thereto
or any  preliminary  prospectus;  provided,  however,  that in no event will the
liability  of any  Stockholder  under this Section 4.4 be greater in amount than
the dollar amount of the proceeds  received by such Stockholder upon the sale of
the Registrable Securities giving rise to such indemnification  obligation. Each
such  Stockholder also agrees to indemnify and hold harmless any Underwriters of
the  Registrable  Securities,  their  officers and directors and each Person who
controls such  Underwriters on  substantially  the same basis as provided for in
the underwriting agreement relating to such offering.

     4.5.  Conduct  of  Indemnification  Proceedings.  In  case  any  proceeding
(including any governmental investigation) is instituted involving any Person in
respect of which indemnity may be sought pursuant to Section 4.3 or Section 4.4,
such Person will promptly  notify the Person  against whom such indemnity may be
sought in writing and the  indemnifying  party upon  request of the  indemnified
party will retain counsel  reasonably  satisfactory to the indemnified  party to
represent  the  indemnified  party and any  others  the  indemnifying  party may
designate in such  proceeding  and will pay the fees and  disbursements  of such
counsel related to the  proceeding;  provided,  however,  that the failure to so
notify the indemnifying  party shall not relieve the indemnifying party from any
liability that it may otherwise have to such indemnified  person,  except to the
extent the  indemnifying  person shall have been  materially  prejudiced by such
failure.  In any such proceeding,  any indemnified  party will have the right to
retain its own counsel, but the fees and expenses of such counsel will be at the
expense of such  indemnified  party  unless (a) the  indemnifying  party and the
indemnified  party have mutually  agreed to the retention of such counsel or (b)
the named  parties to any such  proceeding  (including  any  impleaded  parties)
include both the indemnified party and the indemnifying party and representation
of both  parties by the same  counsel  would be  inappropriate  due to actual or
potential  differing interests between them, in which case the fees and expenses
of such  counsel  will  be  paid  by the  Company.  It is  understood  that  the
indemnifying  party  will not,  in  connection  with any  proceeding  or related
proceedings  in the same  jurisdiction,  be liable for the  reasonable  fees and
expenses of more than one separate  firm of attorneys  (in addition to any local
counsel) at any time for all such  indemnified  parties,  and that all such fees
and  expenses  will be  reimbursed  as they  are  incurred.  In the  case of the
retention of any such separate firm for the indemnified parties,  such firm will
be designated in writing by the indemnified parties. The indemnifying party will
not be liable for any settlement of any proceeding effected without its consent,
but if  settled  with  such  consent,  or if there be a final  judgment  for the
plaintiff,  the  indemnifying  party  will  indemnify  and  hold  harmless  such
indemnified parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment.

<PAGE>

     4.6.  Contribution.  (a) If the indemnification  provided for herein is for
any reason  unavailable  to the  indemnified  parties in respect of any  losses,
claims,  damages or liabilities  referred to herein, then each such indemnifying
party, in lieu of indemnifying  such indemnified  party,  will contribute to the
amount  paid or payable by such  indemnified  party as a result of such  losses,
claims,  damages or liabilities in such  proportion as is appropriate to reflect
the relative  fault of the Company,  the  Stockholders  and any  Underwriter  in
connection  with the  statements  or  omissions  which  resulted in such losses,
claims,  damages  or  liabilities,  as  well  as any  other  relevant  equitable
considerations.  The  relative  fault of the Company,  Stockholders  registering
shares  pursuant  to  Article  III and the  Underwriter  will be  determined  by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged  omission to state a material fact
relates to information supplied by such party, and the parties' relative intent,
knowledge,  access to  information  and  opportunity  to correct or prevent such
statement or omission.

     (b) The Company and each  Stockholder  registering  shares of Common  Stock
pursuant  to  Article  III  agree  that it would  not be just and  equitable  if
contribution pursuant to this Section 4.6 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other  method  of  allocation  which  does not  take  account  of the  equitable
considerations  referred to in the immediately preceding subsection.  The amount
paid or  payable  by an  indemnified  party as a result of the  losses,  claims,
damages or liabilities referred to in the immediately  preceding subsection will
be deemed to include,  subject to the limitations set forth above,  any legal or
other expenses  reasonably incurred by such indemnified party in connection with
investigating  or  defending  any such  action  or  claim.  Notwithstanding  the
provisions  of this Section 4.6, no  Underwriter  will be required to contribute
any  amount  in excess  of the  amount  by which  the  total  price at which the
Registrable  Securities  underwritten  by it and  distributed to the public were
offered to the public  exceeds the amount of any damages which such  Underwriter
has otherwise  been  required to pay by reason of such untrue or alleged  untrue
statement or omission or alleged omission, and no Stockholder registering shares
pursuant to Article III will be required to  contribute  any amount in excess of
the amount by which the total price at which the Registrable  Securities of such
Stockholder  were  offered  to the  public  (less  underwriters'  discounts  and
commissions)  exceeds  the  amount of any  damages  which such  Stockholder  has
otherwise  been  required  to pay by reason of such  untrue  or  alleged  untrue
statement  or  omission  or alleged  omission.  No person  guilty of  fraudulent
misrepresentation  (within the meaning of Section 11(f) of the  Securities  Act)
will be  entitled  to  contribution  from any  person who was not guilty of such
fraudulent misrepresentation.

     4.7. Participation in Underwritten Registrations. No Person may participate
in any underwritten registration hereunder unless such Person (a) agrees to sell
such Person's securities on the basis provided in any underwriting  arrangements
approved by the Persons entitled  hereunder to approve such arrangements and (b)
completes  and executes  all  questionnaires,  powers of attorney,  indemnities,
underwriting  agreements,  lock-up  agreements  and other  documents  reasonably
required  under  the  terms  of  such   underwriting   arrangements   and  these
registration rights.

     4.8. Rule 144. The Company will file any reports required to be filed by it
under the  Securities Act and the Exchange Act and will take such further action
as any  Stockholder  may reasonably  request to the extent required from time to
time  to  enable  the  Stockholders  to  sell  Registrable   Securities  without
registration  under the  Securities  Act within the limitation of the exemptions
provided  by Rule 144, as such Rule may be amended  from time to time,  or other
appropriate  rule or regulation  adopted by the Commission.  Upon the request of
any Stockholder, the Company will deliver to the Stockholder a written statement
as to whether the Company has complied with such reporting requirements.

<PAGE>

     4.9. Restrictions on Public Sale by Holders of Registrable  Securities.  If
and to the extent  requested by the Company,  in the case of a  non-underwritten
Public Offering,  and if and to the extent requested by the managing Underwriter
or Underwriters,  in the case of an underwritten  Public  Offering,  each of the
Stockholders agree not to effect, except as part of such registration,  any sale
of the  shares  of  Securities  or a similar  security  of the  Company,  or any
securities  convertible  into or exchangeable or exercisable for such Securities
during such time  period to which the  Company  agrees not to effect any sale of
securities  in connection  therewith,  or to which the  Registering  Stockholder
agrees if the Company does not include any securities therein. In addition, each
of the Stockholders agrees to execute any customary lock-up agreement reasonably
requested by the managing  Underwriter  to confirm its  agreement in  accordance
with the  preceding  sentence,  but only if  identical  lock-up  agreements  are
required of all principal  Stockholders.  Without limiting the generality of the
foregoing,  MUSI agrees that it and any of its  transferees  will, in connection
with the Initial Public Offering, enter into a lock-up agreement for a period of
up to eighteen  months or, if MUSI does not  exercise its option and acquire the
Option Shares, twenty-four months.


                             V. CERTAIN ARRANGEMENTS

     5.1. Board of Directors.  (a) The  Stockholders  acknowledge and agree that
upon the Initial  Public  Offering,  the Board of  Directors of the Company will
consist of five members,  designated as follows:  (i) one person designated from
time to time by MUSI,  (ii) three  persons  designated  from time to time by the
Frisby Group Representative, and (iii) one person to be designated in accordance
with the terms of the Underwriting  Agreement  between the Company and Barington
Capital Group, L.P.

     (b) Each of the  Stockholders  further  agrees  to vote all the  shares  of
Securities with respect to which it has voting rights,  and to cause all persons
designated by it as Directors to vote (i) in favor of the removal from the Board
of Directors,  upon notice to the other  Stockholders,  of any person or persons
designated by MUSI or the Frisby Group  Representative,  as the case may be, and
to elect to the  unexpired  term of each  Director  so  removed  another  person
designated by MUSI or the Frisby Group  Representative,  as the case may be, and
(ii) in the event of any vacancy on the Board of Directors by reason of death or
resignation,  to elect to such  unexpired  term  another  person  designated  in
accordance with Section 5.1(a) by the  Stockholder  that designated the deceased
or resigned Director.

     5.2.  Certain  Board  Actions.  The  parties  agree that  without the prior
unanimous  approval of the  Directors  designated  by MUSI and the Frisby  Group
Representative, the Company will not:

     (a)  adopt,  during  the  first  twelve  months  after the  Initial  Public
Offering,  any employee  stock option plan, or any stock  appreciation,  phantom
stock,  profit  participation or similar agreement or arrangement other than the
1998 Stock Option Plan, attached as Exhibit B hereto;

     (b) dissolve, liquidate, recapitalize or reorganize the Company; or

     (c) commence any case, proceeding or other action relating to bankruptcy or
reorganization of the Company.

     5.3.  Financial  Information.  From and after the date hereof,  the Company
will transmit to MUSI copies of all financial  information and other information
concerning  the Company's  operations at the same time such  financial and other
information  is given to the  Directors.  Without  limiting the  foregoing,  the
Company will provide MUSI by facsimile  monthly  financial  statements and other
financial  information  prepared for  management  on a regular  basis,  material
business  transaction  information  and such other  information  concerning  the
Company as may be  reasonably  requested by MUSI from time to time. In the event
the Company informs MUSI that the information  provided pursuant to this Section
5.3 constitutes  material non-public  information,  MUSI agrees that it will not
disclose such  information  in violation of  applicable  securities  laws.  MUSI
acknowledges that it is required to comply with applicable securities laws which
restrict  the  transfer  of  Securities  while it is in  possession  of any such
material non-public information.

<PAGE>

     5.4. Key Man  Insurance.  The Company agrees to acquire and maintain a "Key
Man"  insurance  policy in the  amount of at least  $2,500,000  (the  "Insurance
Amount") in respect of G.  Frisby  with the  Company to be named as  beneficiary
under such policy.  The Insurance  Amount shall be adjusted from time to time as
the Board of Directors shall deem necessary or desirable.

     5.5.  Confidentiality  Obligation.  MUSI agrees that the provisions of that
certain Confidentiality  Agreement dated November 14, 1997 (the "Confidentiality
Agreement")  between  Dott.  Luca  Bassani  Antivari and Ernst & Young LLP shall
apply to MUSI with respect to all information provided to it pursuant to Section
5.3 of this  Agreement  as  though  MUSI  were a party  to such  Confidentiality
Agreement.  In addition,  prior to the  disclosure to MUSI of any trade secrets,
know-how or other  confidentiality and proprietary  intellectual property rights
of the  Company,  MUSI  will  enter  into  an  appropriate  confidentiality  and
non-disclosure agreement with the Company.


                                VI. MISCELLANEOUS

     6.1.  Headings.  The  headings in this  Agreement  are for  convenience  of
reference only and will not control or affect the meaning or construction of any
provisions hereof.

     6.2.  Entire  Agreement.  This  Agreement,  the Purchase  Agreement and the
Option  Agreement  constitute  the entire  agreement  between the  parties  with
respect to the subject matter of this Agreement.  This  Agreement,  the Purchase
Agreement  and  the  Option   Agreement   supersede  all  prior  agreements  and
understandings,  both oral and written,  between the parties with respect to the
subject  matter  of this  Agreement,  the  Purchase  Agreement  and  the  Option
Agreement.  None  of  this  Agreement,  the  Purchase  Agreement  or any  Option
Agreement  is intended to confer upon any Person  other than the parties  hereto
and thereto any rights or remedies hereunder or thereunder.  In the event of any
conflict  between the provisions of this Agreement and that certain  Shareholder
Agreement dated as of December 10, 1997 by and among the Company, J. Frisby, and
G. Frisby, the applicable provisions of this Agreement will prevail.

     6.3. Notices. Any notice,  request,  instruction or other document required
or permitted to be given  hereunder by any party hereto to another  party hereto
will be in writing  and will be given to such party at its  address set forth in
Annex I  attached  hereto,  with,  in the case of the  Company,  a copy  sent to
Secretary,  Frisby Technologies,  Inc. at its principal executive offices or, in
the case of a Transfer  permitted  hereunder,  to the address of the  Transferee
specified by it upon notice given in  accordance  with the terms  hereof,  or to
such other  address as the party to whom  notice is to be given may provide in a
written  notice to the party giving such notice,  a copy of which written notice
will be on file with the Secretary of the Company. Each such notice,  request or
other  communication  will be effective (i) if given by certified mail, 72 hours
after  such  communication  is  deposited  in the mails with  certified  postage
prepaid addressed as aforesaid, (ii) one Business Day after being furnished to a
nationally  recognized  overnight  courier for next Business Day  delivery,  and
(iii) on the date sent if sent by  electronic  facsimile  transmission,  receipt
confirmed.

<PAGE>

     6.4.  Applicable  Law. This  Agreement will be governed by and construed in
accordance  with  the laws of the  State  of New  York,  without  regard  to the
conflict of laws rules of such state.

     6.5. Severability.  The invalidity or unenforceability of any provisions of
this  Agreement in any  jurisdiction  will not affect the validity,  legality or
enforceability  of the remainder of this Agreement in such  jurisdiction  or the
validity,  legality or  enforceability  of this  Agreement,  including  any such
provision,  in any other  jurisdiction,  it being  intended  that all rights and
obligations  of the parties  hereunder will be enforceable to the fullest extent
permitted by law.

     6.6. Entire Agreement.  This Agreement constitutes the entire agreement and
understanding  among the parties concerning the subject matter of this Agreement
and supersedes all prior agreements or understandings between the parties.

     6.7.  Termination;  Termination of Rights. This Agreement may be terminated
at any time by an instrument in writing  signed by the Company and  Stockholders
owning at least 90% of the Securities.  At such time as any Stockholder owns 25%
or less of the Securities owned by such  Stockholder on the date hereof,  all of
such   Stockholder's   rights  hereunder,   including  without  limitation  such
Stockholder's  rights  under  Articles  II and III,  will  terminate;  provided,
however,  that all of such  Stockholder's  obligations  hereunder will remain in
full force and effect. 6.8. Successors,  Assigns and Transferees. The provisions
of this  Agreement  will be binding upon and inure to the benefit of the parties
hereto and their respective heirs,  successors and permitted assigns.  Except as
expressly  contemplated hereby,  neither this Agreement nor any provision hereof
will be  construed  so as to confer any right or benefit  upon any Person  other
than the parties to this Agreement and their respective successors and permitted
assigns.

     6.9. Amendments;  Waivers. (a) No failure or delay on the part of any party
in exercising any right,  power or privilege  hereunder will operate as a waiver
thereof,  nor will any single or partial  exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies  herein provided will be cumulative and not exclusive of
any rights or remedies provided by law.

     (b) Neither this Agreement nor any term or provision  hereof may be amended
or waived except by an instrument in writing signed, in the case of an amendment
or  waiver,  by  the  Company  and  Stockholders  owning  at  least  90%  of the
Securities.

     6.10.  Counterparts.  This  Agreement  may be  executed  in any  number  of
counterparts,  each of which will be an original  with the same effect as if the
signatures thereto and hereto were upon the same instrument.

<PAGE>

     6.11. Remedies. The parties hereby acknowledge that money damages would not
be adequate  compensation for the damages that a party would suffer by reason of
a failure  of any other  party to  perform  any of the  obligations  under  this
Agreement.  Therefore, each party hereto agrees that specific performance is the
only  appropriate  remedy under this  Agreement  and hereby  waives the claim or
defense that any other party has an adequate remedy at law.

     6.12.  Consent to  Jurisdiction.  Each of the  Stockholders and the Company
irrevocably  submits to the  non-exclusive  jurisdiction of any court located in
the Borough of  Manhattan  or the United  States  Federal  Court  sitting in the
Southern District of New York over any suit, action or proceeding arising out of
or relating to this Agreement. Each of the Stockholders and the Company consents
to process being served in any such suit, action or proceeding by serving a copy
thereof  upon the agent for  service  of  process,  provided  that to the extent
lawful and possible,  written notice of such service will also be mailed to such
Stockholders or the Company,  as the case may be. Each of the  Stockholders  and
the Company  agrees that such service will be deemed in every respect  effective
service of process upon such Stockholders or the Company, as the case may be, in
any such  suit,  action  or  proceeding  and will be taken  and held to be valid
personal  service  upon such  Stockholder  or the  Company,  as the case may be.
Nothing in this  subsection  will affect or limit any right to serve  process in
any  manner  permitted  by  law,  to  bring  proceedings  in the  courts  of any
jurisdiction  or to  enforce in any lawful  manner a  judgment  obtained  in one
jurisdiction in any other jurisdiction. Each of the Stockholders and the Company
waives any right it may have to assert the doctrine of forum non  conveniens  or
to object to venue to the extent any  proceeding is brought in  accordance  with
this Section 6.11.

     6.13.  Termination  of Certain Right.  MUSI's right to designate  Directors
pursuant to Section 5.1 and MUSI's rights under  Section 2.3 shall  terminate if
(a) Dott.  Luca  Bassani  Antivari  ceases to own,  directly  or  indirectly,  a
majority of the voting  securities of MUSI, or (b) MUSI transfers  fifty percent
(50%) or more of its Securities to one or more Permitted Transferees.


<PAGE>


     IN WITNESS  WHEREOF,  the parties hereto have executed this Agreement as of
the date first above written.


                                          FRISBY TECHNOLOGIES, INC.


                                      By: /s/Gregory S. Frisby
                                          --------------------------------
                                           Name:  Gregory S.Frisby
                                           Title: President


                                  STOCKHOLDERS:

                                          /s/Gregory S. Frisby
                                          ---------------------------------
                                          Gregory S. Frisby

                                          /s/Jeffry D. Frisby
                                          ---------------------------------
                                          Jeffry D. Frisby


                                          MUSI INVESTMENTS S.A.



                                      By:/s/Dott. Luca Bassani Antivari
                                         ----------------------------------
                                          Name: Dott. Luca Bassani Antivari
                                          Title: President


<PAGE>


                                    EXHIBIT A

            Certificate of Designation of Convertible Preferred Stock


                    CERTIFICATE OF DESIGNATIONS, PREFERENCES
                  AND RIGHTS OF THE CONVERTIBLE PREFERRED STOCK
                          OF FRISBY TECHNOLOGIES, INC.

     FRISBY  TECHNOLOGIES,  INC., a corporation  organized and exiting under the
General  Corporation  Law of the State of  Delaware  (the  "Corporation"),  DOES
HEREBY CERTIFY:

     That,  pursuant to authority  conferred  upon the Board of Directors by the
Certificate of Incorporation (as amended) of said  corporation,  and pursuant to
the  provisions  of Section 151 of Title 8 of the  Delaware  code of 1953,  said
Board of Directors,  adopted a resolution  providing for which  resolution is as
follows:

     BE IT RESOLVED,  that the Corporation  be, and it hereby is,  authorized to
create  and  issue  1,000,000  shares  of  preferred  stock,  par  value  $.001,
designated Convertible Preferred Stock ("Convertible Preferred Stock"), with the
powers, designations, preferences and rights and the qualifications, limitations
or restrictions thereof hereinafter set forth in this resolution:

     1.  Dividends.  The shares of  Convertible  Preferred  Stock  shall only be
entitled to  dividends  (whether in cash or property or  securities,  other than
dividends which are paid or intended to be paid in connection with distributions
of the  Corporation's  assets upon the  voluntary  or  involuntary  liquidation,
dissolution or winding up of the Corporation) when declared by the Corporation's
Board of Directors.  Each share of Convertible  Preferred  Stock with respect to
dividend  payments  shall  be equal in every  respect  to every  other  share of
Convertible  Preferred Stock.  Prior to any payment of any dividend with respect
to any share of Common Stock, each share of Convertible Preferred Stock shall be
entitled to receive,  when declared by the Corporation's  Board of Directors,  a
dividend or dividends which  aggregate $1.00 per share of Convertible  Preferred
Stock (the "Dividend Preference"). Upon payment of the Dividend Preference, each
share of Convertible  Preferred  Stock shall  thereafter  share equally with all
shares of Common Stock, whether now or hereafter authorized, with respect to any
dividend which may, from time to time, be declared by the Corporation's Board of
Directors.  All dividends or distributions which are paid or intended to be paid
in connection  with a liquidation,  dissolution or winding up of the Corporation
shall be preferred, as provided in Sections 3(a) and 3(b) hereof.

     2.  Voting  Rights;  No  Preemptive  Rights.  The  holders  of  Convertible
Preferred Stock shall, by virtue of their ownership thereof, be entitled to cast
one vote  per  share  thereof  on each  matter  submitted  to the  Corporation's
shareholders  for voting.  Such votes shall be cast  together with those cast by
the  holders  of Common  Stock as one  class,  except as  required  by law.  The
Convertible Preferred Stock shall not have cumulative voting rights. The holders
of Convertible  Preferred  Stock shall not have any  preemptive  rights upon the
issuance or sale of any securities.

<PAGE>

     3. Liquidation Rights.

     (a) If the Corporation  shall be voluntarily or  involuntarily  liquidated,
dissolved or wound up at any time when any of the  Convertible  Preferred  Stock
shall be outstanding,  the holders of the then outstanding Convertible Preferred
Stock shall have a preference against the assets (including cash, securities and
property) of the  Corporation  available for  distribution to the holders of the
Common Stock equal to the sum of (i) $4.26 per share and (ii) an amount equal to
all declared but unpaid dividends (the "Preference Amount");  provided, however,
that any  reduction  of the  authorized  or  issued  shares  of the stock of the
Corporation  of any class,  whether now or  hereafter  authorized,  shall not be
deemed to be a liquidation of the  Corporation  within the meaning of any of the
provisions of this Section 3; and provided, further, however, that a liquidation
for the  purposes  of this  Section  shall not be  deemed  to occur if:  (a) the
consolidation  or  merger of the  Corporation  into or with any  corporation  or
corporations  wherein  the  holders of the  Convertible  Preferred  Stock are to
receive  preferred  securities  of the  merged  or  consolidated  entity  having
substantially  similar  rights,  preferences  and  protections  as  those of the
Convertible  Preferred  Stock (as  contemplated  herein);  (b) the merger of the
Corporation  with another  corporation in which the Corporation is the surviving
corporation and which does not result in any reclassification or change -- other
than a change  in par  value,  or from par  value to no par value or from no par
value to par  value,  or as a  result  of a  subdivision  or  combination  -- of
outstanding  shares of the  Corporation's  Common  Stock;  or (c) the  transfer,
assignment or contribution of the  Corporation's  assets in connection  with, or
the creation of, any joint venture or limited  liability  entity in exchange for
an equity  interest shall not be deemed to be a liquidation  for the purposes of
this Section.

     (b) All of the  Preference  Amount to be paid to the holders of Convertible
Preferred  Stock as  provided  in this  Section 3 shall be paid or set apart for
payment  before the  payment or setting  apart for payment of any amount for, or
the  distribution  of any  property  of the  Corporation  to, the holders of any
Common  Stock,  whether now or hereafter  authorized,  in  connection  with such
liquidation, dissolution or winding up.

     (c) Following the full payment of the Preference Amount, the holders of the
Convertible  Preferred Stock shall thereafter  receive,  upon the liquidation or
dissolution  of the  Corporation,  at the same time and on the same terms as the
holders of the Common Stock  receive,  a portion of the remaining  assets of the
Corporation  which are distributable to the holders of the Common Stock equal to
an amount which would have been  distributed if the Convertible  Preferred Stock
had been  converted  into  Common  Stock  immediately  prior to the date of such
liquidation or dissolution.

     4.  Redemption.  The  Corporation  shall not redeem,  purchase or otherwise
acquire,  directly or indirectly  through a subsidiary or otherwise,  any of the
Convertible  Preferred  Stock  without the consent of all of the then holders of
the  Convertible  Preferred  Stock.  No shares of  Convertible  Preferred  Stock
redeemed or  purchased  by the  Corporation  pursuant to this Section 4 shall be
reissued by the Corporation.

<PAGE>

     5. Conversion.

     (a) Optional Conversion.  The holder of any shares of Convertible Preferred
Stock  may (1)  during  the  sixty  day  period  commencing  after the 370th day
following the closing of the  Corporation's  Initial Public Offering,  or (2) at
any time  following  the 270th  day  following  the  issuance  of the  shares of
Convertible  Preferred  Stock,  if the Initial Public  Offering has not occurred
prior to such date, convert, at such holder's option, all or any portion of such
shares of Convertible  Preferred  Stock into Common Stock at the then applicable
Conversion  Ratio. At the time of conversion,  the Corporation shall pay in cash
to each holder of  Convertible  Preferred  Stock so converted an amount equal to
all  unpaid  dividends,  accrued  thereon  to the  date of  conversion,  if such
dividend was declared by the Board of Directors of the Corporation. In the event
of  conversion,  the  Corporation  shall  forthwith  transmit  to each holder of
Convertible  Preferred  Stock a certificate  or  certificates  for the shares of
Common Stock issued as a result  thereof  dated the date of  conversion  against
delivery  of  the  certificate  or  certificates  representing  the  Convertible
Preferred  Stock to be converted at the principal  office of the Corporation (or
at such other place as the Corporation may designate in a written notice sent to
the holder by first-class  mail,  postage  prepaid,  at its address shown on the
books of the Corporation),  and such holders shall be deemed for all purposes to
be the holders of such Common Stock as of the date of conversion.

     (b) Stock Fully Paid;  Reservation  of Shares.  All shares of Common  Stock
which may be issued upon  conversion of Convertible  Preferred  Stock will, upon
issuance, be duly issued, fully paid and non-assessable and free from all taxes,
liens and  charges  with  respect  to the issue  thereof.  At all times that any
Convertible   Preferred  Stock  is  outstanding,   the  Corporation  shall  have
authorized,  and shall  have  reserved  for the  purpose of  issuance  upon such
conversion, a sufficient number of shares Common Stock.

     (c)  Reclassification,   Consolidation  or  Merger.  In  the  case  of  any
reclassification  or change (a  "Reclassification")  of outstanding Common Stock
issuable upon conversion of Convertible  Preferred Stock (other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination),  including any Reclassification
in the case of any  consolidation  or  merger  of the  Corporation  with or into
another corporation which does not constitute a liquidation under Section 3, the
Convertible  Preferred Stock shall, without payment of additional  consideration
therefor,  be deemed modified so as to provide that upon the Optional Conversion
provided herein, each share of the Convertible Preferred Stock shall procure, at
the time of the  Optional  Conversion,  in lieu of each  share of  Common  Stock
theretofore  issuable  upon such  conversion,  the kind and  amount of shares of
stock,  other  securities,   options,   rights,  warrants,  money  and  property
receivable  upon  such  Reclassification,  by the  holder of one share of Common
Stock.  The provisions of this  subsection  shall  similarly apply to successive
Reclassifications.

<PAGE>

     (d) Subdivision or Combination of Shares.  If the Corporation,  at any time
or times while any of the  Convertible  Preferred  Stock is  outstanding,  shall
subdivide or combine its Common Stock,  the Conversion  Ratio of the Convertible
Preferred Stock (i.e., one share of Convertible  Preferred Stock to one share of
Common Stock) shall be proportionately reduced or increased, as of the effective
date of such subdivision or combination.

     6. No Reissuance of Convertible  Preferred  Stock. No shares of Convertible
Preferred Stock which have been converted into Common Stock shall be reissued by
the Corporation;  provided,  however,  that each such share, after being retired
and  cancelled,  shall be restored to the status of an  authorized  but unissued
share of preferred stock without  designation as to series and may thereafter be
issued as a share of preferred stock not designated  Convertible Preferred Stock
upon proper corporate and shareholder authorization.

     7. Protective  Provisions.  So long as any shares of Convertible  Preferred
Stock shall be outstanding,  the Corporation  shall not, without the approval by
the vote or written  consent of the holders of at least 75% (or more if required
by law) of the shares of Convertible Preferred Stock outstanding at the time:

     (a)  Amend or  repeal  any  provision  of,  or add any  provision  to,  the
Corporation's Certificate of Incorporation (including,  without limitation,  any
resolution of the Board  comprising a portion thereof fixing and determining the
terms of any series of preferred,  whether now or hereafter  authorized)  or the
Corporation's  By-Laws,  if such action  would  alter or change the  Convertible
Preferred Stock or any right or preference thereof;

     (b) Enter into any agreement,  indenture or other instrument which contains
any provision (i) restricting the payment of dividends by the Corporation on the
Convertible   Preferred  Stock;  or  (ii)  restricting  the  conversion  of  the
Convertible Preferred Stock to the full extent permitted by Section 5 hereof;

     8.  Parity.  If at any time any  payment is  required to be made on or with
respect to Convertible  Preferred Stock and the Corporation  does not have funds
sufficient  to make all payments  then required to be made on or with respect to
the Convertible  Preferred Stock in full, the Corporation shall make payments on
or with respect to the  Convertible  Preferred  Stock such that the payment made
with respect to each is a substantially identical proportion of the full payment
then due with respect to each.

     9.  Definitions.  As used herein,  the  following  terms have the following
meanings:

     (a) "Common  Stock" shall mean the  Corporation's  Common Stock,  $.001 par
value, and any stock into which such Common Stock may hereafter be changed.

     (b) "Conversion Ratio" shall mean, initially, one share of Common Stock for
each share of Convertible Preferred Stock (1:1), which Conversion Ratio shall be
subject to adjustment in accordance with Section 5 hereof.

     (c) "Initial Public Offering" shall mean an underwritten public offering of
equity Securities registered under the Securities Act of 1933, as amended (i) in
which the per share price of the Common Stock to the public is equal to at least
$5.00 and (ii) in which the Company receives proceeds net of all costs, expenses
and  underwriting   discounts  and  commissions  of  not  less  than  $5,000,000
(including  proceeds received by the Company upon exercise of any over-allotment
option by the underwriters), in each case as determined by the amounts set forth
on the cover page of the prospectus for such offering.

     (d) "Person" shall mean an  individual,  a  corporation,  a partnership,  a
limited  liability  entity,  a  trust,  an  unincorporated   organization  or  a
government organization or an agency or political subdivision thereof.

     (e)  "Securities"   shall  mean  any  debt  or  equity  securities  of  the
Corporation, whether now or hereafter authorized, and any instrument convertible
into or exchangeable  for Securities or a Security.  The term  "Security"  shall
mean one of the Securities.

     IN WITNESS  WHEREOF,  the  undersigned  has caused this  Certificate  to be
signed by Gregory S. Frisby, President, this 9th day of March, 1998.


                                       FRISBY TECHNOLOGIES, INC.


                                BY:   /s/Gregory S. Frisby
                                      ----------------------------------
                                      Gregory S.Frisby, President
 


                                    EXHIBIT B

                             1998 Stock Option Plan
                                                                   

                            FRISBY TECHNOLOGIES, INC.

                             1998 STOCK OPTION PLAN

     1. Plan;  Purpose;  General.  The  purpose of this Stock  Option  Plan (the
"Plan") is to advance the interests of Frisby Technologies, Inc. and any present
and  future  subsidiaries  (as  defined  below)  of  Frisby  Technologies,  Inc.
(hereinafter  inclusively referred to as the "Company") by enhancing the ability
of the Company to attract and retain selected employees,  consultants,  advisors
and  directors   (collectively   the   "Participants")   by  creating  for  such
Participants  incentives and rewards for their  contributions  to the success of
the Company,  and by encouraging such Participants to become owners of shares of
the Company's Common Stock, par value $.001 per share, as the title or par value
may be amended (the "Shares").

     2. Effective Date of Plan. The Plan will become  effective upon approval by
the Board of Directors of the Company (the "Board"), and shall be subject to the
approval by the shareholders of the Company as provided under the Securities Act
of 1933, as amended (the "Act").

     3. Administration  of the Plan. (a) The Plan will be  administered  by the
Board,   subject  to  Paragraph  3(b).  The  Board  will  have  authority,   not
inconsistent  with the  express  provisions  of the  Plan,  to take  all  action
necessary or appropriate thereunder, to interpret its provisions,  and to decide
all questions and resolve all disputes which may arise in connection  therewith.
Such determinations of the Board shall be conclusive and shall bind all parties.
(b) The Board may, in its  discretion,  delegate  its powers with respect to the
Plan  to an  employee  benefit  plan  committee  or  any  other  committee  (the
"Committee"), in which event all references to "the Board" hereunder,  including
without  limitation the references in Section 9, but excluding the references in
Section  2,  shall be  deemed to refer to the  Committee.  The  Committee  shall
consist of not fewer than two (2) members of the Board; provided,  however, that
if, at any time the awards under the Plan are granted, the Company is subject to
the reporting  requirements  of the Securities  Exchange Act of 1934, as amended
(the  "Exchange  Act"),  each  of  the  members  of  the  Committee  must  be  a
"non-employee director" as that term is defined in Rule 16b-3 as promulgated and
amended from time to time by the  Securities and Exchange  Commission  under the
Exchange Act, or any successor thereto ("Rule 16b-3"). In addition,  at any time
the  Company  is  subject  to  Section  162(m) of the Code,  each  member of the
Committee shall be an "outside  director" within the meaning of such Section.  A
majority of the members of the  Committee  shall  constitute  a quorum,  and all
determinations of the Committee  (including  determinations of eligibility,  the
number of Options  granted to a Participant  and the exercise  price of Options)
shall  be  made  by the  majority  of its  members  present  at a  meeting.  Any
determination  of the  Committee  under the Plan may be made  without  notice or
meeting of the Committee by a writing signed by all of the Committee members.

     4.  Eligibility.  The  Participants  in the Plan  shall  be all  employees,
consultants, advisors and directors of the Company who are selected by the Board
whether or not they are also officers of the Company;  provided,  however,  that
Incentive  Options  shall only be  granted  to  employees  of the  Company,  and
provided further, however, that Gregory S. Frisby and Jeffry D. Frisby shall not
be eligible Participants.

     5. Grant of Options.

     (a) The Board  shall  grant  Options to  Participants  that it, in its sole
discretion,  selects.  Options shall be granted in accordance with the terms and
conditions  set forth in Section 6 hereof and on such other terms and conditions
as  the  Board  shall  determine.  Such  terms  and  conditions  may  include  a
requirement  that a  Participant  sell to the Company any Shares  acquired  upon
exercise of Options upon the  Participant's  termination of employment upon such
terms and  conditions  as the Board may  determine.  Incentive  Options shall be
granted on terms that comply with the Code and Regulations thereunder.

     (b)  Options  granted  pursuant  to the  Plan  (the "Options")  may be (i)
incentive stock options ("Incentive Options") that are intended to qualify under
the Internal  Revenue Code of 1986,  as amended (the  "Code"),  or, (ii) options
that are not intended to so qualify,  or, (iii) both. The proceeds received from
the sale of Shares  pursuant  to the Plan  shall be used for  general  corporate
purposes.

     (c) No  Options  shall be  granted  after  December  31,  2007 but  Options
previously  granted may be exercised after that date until the expiration of the
Option.

     6. Terms and Conditions of Options

     (a) Exercise  Price.  The purchase price per share for Shares issuable upon
exercise  of Options  shall be a minimum of one hundred  (100%)  percent of fair
market value on the date of grant as determined by the Board.  For this purpose,
"fair  market  value"  will be  determined  as set  forth in  Section  8 hereof.
Notwithstanding the foregoing,  if any person to whom an Option is to be granted
owns in excess of ten (10%) percent of the combined  voting power of all classes
of outstanding capital stock of the Company (a "Principal Shareholder"), then no
Option  may be  granted  to such  person  for less than one  hundred  ten (110%)
percent  of the fair  market  value on the  date of grant as  determined  by the
Board.

     (b) Period of Options.  The expiration of each Option shall be fixed by the
Board, in its discretion, at the time such Option is granted. No Option shall be
exercisable  after the  expiration  of five (5) years from the date of its grant
and each Option shall be subject to earlier termination as expressly provided in
this Section 6 hereof or as determined by the Board, in its  discretion,  on the
date such Option is granted.

     (c) Payment for  Delivery  of Shares.  Shares  which are subject to Options
shall be issued only upon receipt by the Company of full payment of the purchase
price for the Shares as to which the Option is exercised. Payment for Shares may
be made (as  determined  by the Board at the time the Option is granted)  (i) in
cash; (ii) by certified or bank check payable to the order of the Company in the
amount  of the  purchase  price;  (iii)  by  delivery  of  Shares  owned  by the
Participant  having a fair market value equal to the purchase  price; or (iv) by
any combination of the methods of payment  described in (i) through (iii) above,
as determined by the Board at the time the Option is granted.

     In addition, any grant of a nonqualified Option may provide that payment of
the  purchase  price for the  Option may also be made in whole or in part in the
form of  Shares  that are  subject  to risk of  forfeiture  or  restrictions  of
transfer.  Unless  otherwise  determined  by the  Board on or after  the date of
grant,  whenever any purchase price for an Option is paid in whole or in part by
means of any of the forms of  consideration  specified in this Section 6(c), the
Shares received by the Participant upon the exercise of the nonqualified  Option
shall be subject to the same risk of forfeiture or  restrictions  on transfer as
those  that  applied  to  the  consideration  surrendered  by  the  Participant;
provided,  however,  that such risks of forfeiture and  restrictions on transfer
shall apply only to the same number of Shares  received  by the  Participant  as
applied to the forfeitable or restricted Shares surrendered by the Participant.

     Any grant may, if there is then a public market for the Shares, provide for
deferred  payment of the purchase price for the Option from the proceeds of sale
through a broker of some or all of the Shares to which the exercise relates.

     The Company  shall not be obligated to deliver any Shares unless and until,
in the opinion of the Company's  counsel,  all applicable federal and state laws
and  regulations  have been  complied  with and until all other legal matters in
connection  with the issuance  and delivery of Shares have been  approved by the
Company's counsel. Without limiting the generality of the foregoing, the Company
may require from the person exercising an Option such investment  representation
or such agreement,  if any, as counsel for the Company may consider necessary in
order to comply with the Act and applicable state securities laws.

     (d) Legend on Certificates.  The stock certificates representing the Shares
shall carry such appropriate  legends,  and such written  instructions  shall be
given to the Company's  transfer agent, as may be deemed  necessary or advisable
by counsel to the Company in order to comply with the requirements of the Act or
any state securities laws.

     (e) Rights as Shareholder. A Participant or a transferee of an Option shall
have no rights as a Shareholder with respect to any Shares covered by the Option
until the date of the issuance of a stock certificate to him for such Shares. No
adjustment shall be made for dividends  (ordinary or  extraordinary,  whether in
cash,  securities or other  property) or  distribution of other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 7 hereof.  Each grant of Options  shall be  evidenced  by an
agreement, which shall be executed on behalf of the Company and delivered to and
accepted by the  Participant  and shall contain such terms and provisions as the
Board may determine consistent with the Plan.

     (f)  Vesting.  Options  granted  shall vest in the  Participant  and become
immediately  exercisable by the  Participant on the fourth (4th)  anniversary of
the date of grant or such  earlier date as the Board of  Directors,  at its sole
discretion, may determine,  provided, however, for every option granted for more
than 50,000  Shares,  no more than  one-third  (1/3) of such shares shall become
vested and exercisable earlier than twelve (12) months following the date of the
grant,  and no more than a total of two-thirds (2/3) of such Shares shall become
vested and exercisable earlier than thirty (30) months following the date of the
grant.

     (g) Non-Transferability of Options. Except as provided in Sections 6(h)(ii)
and  (iii),  Options  granted  under  this  Plan may not be  exercised  during a
Participant's lifetime except by the Participant, other than by will or the laws
of descent  and  distribution.  Options may not be sold,  assigned or  otherwise
transferred  or  disposed  of in any manner  whatsoever  except as  provided  in
Section 6(h)  hereof.  Notwithstanding  the  foregoing,  the Board,  in its sole
discretion,  may provide for the transferability of particular awards under this
Plan so long as such  provisions  would not  disqualify  the exemption for other
awards under Rule 16b-3, if then applicable to awards under the Plan.  Moreover,
any grand made under  this Plan may  provide  that all or any part of the Shares
issued or  transferred  by the Company upon exercise of Options shall be subject
to further restrictions on transfer.

     (h) Termination of Relationship.  Except as otherwise provided in an Option
or other agreement  between the Company and a Participant,  upon the termination
of a Participant's status as an employee,  consultant,  advisor or director, for
any reason other than as set forth in  subsections  (ii) and (iii)  below,  at a
time when the  Shares are then  Publicly  Traded (as  defined  below),  then the
following provisions shall apply:

     (i) Such Participant may exercise Options to the extent  exercisable on the
date of termination not later than three (3) months (or such shorter time as may
be specified in the grant),  after the date of such  termination.  To the extent
that the Participant was not entitled to exercise the Option at the date of such
termination,  or does not exercise such Option within the time specified herein,
such Option shall expire and terminate. Notwithstanding anything else herein, if
the  employment or other  relationship  of any  Participant  shall be terminated
voluntarily by the  Participant  and without the consent of the Company,  or for
"Cause" (as hereinafter  defined),  then any Option granted to such  Participant
(whether or not then  vested in the  Participant)  to the extent not  previously
exercised shall expire  immediately on the date of termination.  For purposes of
the Plan,  "Cause"  shall mean  "Cause" as defined in any  employment  agreement
between any employee Participant and the Company ("Employment  Agreement"),  and
in the absence of an  Employment  Agreement or in the absence of a definition of
"Cause" in such  Employment  Agreement,  "Cause"  shall mean:  (i) any continued
failure by the employee  Participant to obey the reasonable  instructions of the
president or any member of the Board;  (ii) continued neglect by the Participant
of his duties and  obligations  as an  employee  of the  Company or a failure to
perform  such  duties and  obligations  to the  reasonable  satisfaction  of the
president or the Board;  (iii) willful  misconduct of the  Participant  or other
actions  in bad  faith by the  Participant  which  are to the  detriment  of the
Company, including, without limitation,  commission of a felony, embezzlement or
misappropriation  of funds or of  confidential  information or commission of any
act of  fraud;  or (iv) a breach of any  material  provision  of any  Employment
Agreement not cured within ten (10) days after written notice thereof.

     (ii)  Notwithstanding  the provisions of subsection (i) above, in the event
of  termination  of a  Participant's  status  as  an  employee  as a  result  of
"permanent  disability"  (as such term is defined in any contract of  employment
between the Company and the Participant or, if not defined, then such term shall
mean the inability to engage in any  substantial  gainful  activity by reason of
any medically  determinable  physical or mental impairment which can be expected
to  result  in  death or  which  has  lasted  or can be  expected  to last for a
continuous  period of twelve (12) months),  the Participant  (or, in the case of
the  Participant's  legal  incapacity,  such  Participant's  guardian  or  legal
representative acting in a fiduciary capacity on behalf of the Participant under
state law and court supervision) may exercise the Option, but only to the extent
such Option was  exercisable on the date the  Participant  ceased working as the
result of the  permanent  disability.  Such  exercise  must occur within six (6)
months (or such  shorter  time as is  specified  in the grant)  from the date on
which the Participant ceased working as a result of the permanent disability. To
the extent that the  Participant was not entitled to exercise such Option on the
date the Participant ceased working, or does not exercise such Option within the
time specified herein, such Option shall terminate.

     (iii)  Notwithstanding the provisions of subsection (i) above, in the event
of the death of a Participant,  the Option may be exercised,  at any time within
six (6)  months  following  the date of death  (or such  shorter  time as may be
specified in the grant), by the Participant's estate or by a person who acquired
the right to exercise the Option by will or the  applicable  laws of descent and
distribution,  but only to the extent such Option was exercisable on the date of
the Participant's  death. To the extent that the Participant was not entitled to
exercise such Option on the date of death, or the Option is not exercised within
the time specified herein, such Option shall terminate.

     (iv)  Notwithstanding  subsections  (i), (ii),  and (iii) above,  the Board
shall have the authority to extend the expiration date of any outstanding Option
in circumstances in which it deems such action to be appropriate  (provided that
no such  extension  shall extend the term of an Option  beyond the date on which
the  Option  would  have  expired  if  no  termination   of  the   Participant's
relationship's with the Company had occurred).

     (h) Financial  Assistance.  The Company is vested with authority under this
Plan to assist any employee to whom an Option is granted  hereunder  (including,
to the extent  permitted  by law,  any director or officer of the Company who is
also an employee of the Company) in the payment of the purchase price payable on
exercise of that Option,  by lending the amount of such  purchase  price to such
employee on such terms and at such rates of interest and upon such  security (or
unsecured) as shall have been authorized by or under authority of the Board.

     (i) Withholding Taxes. To the extent required by applicable federal, state,
local or foreign law, a Participant shall make arrangements  satisfactory to the
Company for the  satisfaction of any  withholding tax obligations  that arise by
reason of an Option  exercise or any sale of Shares.  The  Company  shall not be
required to issue Shares until such  obligations  are  satisfied.  The Board may
permit  these  obligations  to be  satisfied  by having the  Company  withhold a
portion of the Shares that  otherwise  would be issued to the  Participant  upon
exercise  of the  Option,  or to  the  extent  permitted,  by  tendering  Shares
previously acquired.

<PAGE>

     7. Shares Subject to Plan.

     (a) Number of Shares and Stock to be Delivered.  Shares delivered  pursuant
to this Plan shall in the  discretion  of the Board be  authorized  but unissued
Shares or previously  issued  Shares  acquired by the Company.  The  unexercised
portion of any expired,  terminated or cancelled Option shall again be available
for the grant of Options  under the Plan.  Subject to  adjustment  as  described
below,  the  aggregate  number of Shares which may be delivered  under this Plan
shall not exceed two hundred fifty thousand (250,000) Shares.

     (b)  Changes  in Stock.  In the  event of a stock  dividend,  stock  split,
combination  of  Shares,  recapitalization  or  similar  change  in the  capital
structure of the Company,  merger in which the Company is the surviving Company,
consolidation,   spin-off,   split  up,  reorganization,   partial  or  complete
liquidation  or other  distribution  of assets,  issuance  of  warrants or other
rights to purchase securities or any other corporate transaction or event having
any  effect  similar to any of the  foregoing,  the number and kind of Shares of
stock or securities of the Company to be subject to the Plan and to Options then
outstanding  or to be  granted  thereunder,  the  maximum  number  of  Shares or
securities  which may be  delivered  under the Plan,  the Option price and other
relevant   provisions  may  be  appropriately   adjusted  by  the  Board,  whose
determination  shall be binding on all persons. In the event of a consolidation,
merger or tender  offer in which the  Company  is not the  surviving  Company or
which results in the acquisition of substantially all the Company's  outstanding
stock by a single  person or entity,  or in the event of the sale or transfer of
substantially all the Company's assets, all outstanding Options,  whether or not
then exercisable, shall immediately become exercisable. In such event, the Board
shall  notify  the  Participants  that all  outstanding  Options  shall be fully
exercisable for a period of fifteen (15) days from the date of such notice,  and
the Option will terminate upon the expiration of such period.

     The Board may also  adjust  the  number of Shares  subject  to  outstanding
Options,  the exercise price of outstanding Options and the terms of outstanding
Options to take into consideration  material changes in accounting  practices or
principles, consolidations or mergers (except those described in the immediately
preceding  paragraph),  acquisitions or dispositions of stock or property or any
other event if it is determined by the Board that such adjustment is appropriate
to avoid distortion in the operation of the Plan.

     8. Certain Definitions.

     Certain  terms used in the Plan have been defined  above.  In addition,  as
used in the Plan, the following terms shall have the following meanings:

     (a) A "subsidiary"  is any company (i) in which the Company owns,  directly
or  indirectly,  stock  possessing  fifty  (50%)  percent  or more of the  total
combined voting power of all classes of stock or (ii) over which the Company has
effective operating control.

     (b) The "fair market value" of the Shares shall mean:

     (i) If the Shares are then Publicly Traded: The closing price of the Shares
as of the day in question (or, if such day is not a trading day in the principal
securities  market or markets for such Shares,  on the nearest preceding trading
day), as reported  with respect to the market (or the  composite of markets,  if
more than one) in which  Shares are then traded,  or, if no such closing  prices
are reported, on the basis of the mean between the high bid and low asked prices
that day on the  principal  market or quotation  system on which Shares are then
quoted,  or, if not so quoted, as furnished by a professional  securities dealer
making a market in such Shares selected by the Board; or

     (ii) If the Shares  are then not  Publicly  Traded:  The price at which one
could reasonably  expect such Shares to be sold in an arm's length  transaction,
for cash,  other than on an  installment  basis,  to a person not  employed  by,
controlled  by, in control of or under  common  control  with the issuer of such
Shares.  Such fair  market  value shall be that which has  concurrently  or most
recently been  determined for this purpose by the Board, or at the discretion of
the Board by an independent  appraiser or appraisers  selected by the Board,  in
either case giving due consideration to recent transactions involving Shares, if
any, the  issuer's  net worth,  prospective  earning  power and  dividend-paying
capacity,  the goodwill of the issuer's business, the issuer's industry position
and its management, that industry's economic outlook, the value of securities of
issuers  whose  Shares  are  Publicly  Traded  and which are  engaged in similar
businesses,  the effect of  transfer  restrictions  to which such  Shares may be
subject under law and under the applicable terms of any contract  governing such
Shares,  the absence of a public market for such Shares and other matters as the
Board or its appraiser or appraisers deem pertinent.  The  determination  by the
Board or its  appraiser or  appraisers  of the fair market  value shall,  if not
unreasonable,  be conclusive and binding  notwithstanding  the possibility  that
other persons might make a different, and also reasonable, determination. If the
fair market  value to be used was thus fixed more than twelve (12) months  prior
to the day as of which fair market  value is being  determined,  it shall in any
event be no less than the book  value of the Shares  being  valued at the end of
the most  recent  period  for which  financial  statements  of the  Company  are
available; or

     (iii)  Shares  are  "Publicly  Traded"  if stock of that class is listed or
admitted to unlisted  trading  privileges on a national  securities  exchange or
designated as a national  market  system  security on an  interdealer  quotation
system by the National  Association of Securities  Dealers,  Inc. ("NASD") or if
sales or bid and offer  quotations  are  reported for that class of stock in the
automated quotation system ("NASDAQ") operated by the NASD.

     9.  Indemnification  of Board.  In addition to and without  affecting  such
other  rights of  indemnification  as they may have as  members  of the Board or
otherwise,  each member of the Board shall be  indemnified by the Company to the
extent legally possible against expenses,  including reasonable attorney's fees,
actually and reasonably incurred in connection with any appeal therein, to which
he may be a party by reason of any  action  taken or  failure to act under or in
connection  with the Plan,  or any Option  granted  thereunder,  and against all
judgments,  fines and amounts paid by him in settlement  thereof;  provided that
such payment of amounts so  indemnified  is first  approved by a majority of the
members of the Board who are not parties to such action, suit or proceedings, or
by  independent  legal  counsel  selected by the Company,  in either case on the
basis of a determination that such member acted in good faith and in a manner he
reasonably  believed  to be in or not  opposed  to  the  best  interests  of the
Company; and except that no indemnification shall be made in relation to matters
as to which it shall be adjudged in such action,  suit or  proceeding  that such
Board  member  is  liable  for a breach  of the duty of  loyalty,  bad  faith or
intentional  misconduct  in his duties;  and  provided  further,  that the Board
member shall in writing offer the Company the  opportunity,  at its own expense,
to handle and defend same.

     10.  Amendments.  The Board may at any time  discontinue  granting  Options
under the Plan.  The Board may at any time or times  amend the Plan or amend any
outstanding  Option or Options for the purpose of satisfying the requirements of
any changes in applicable laws or regulations or for any other purpose which may
at the time be permitted by law,  provided that (except to the extent explicitly
required or permitted  hereinabove) no such amendment will, without the approval
of the  shareholders  of the Company:  (a) increase the maximum number of Shares
available under the Plan; (b) reduce the Option price of outstanding  Options or
reduce the price at which  Options  may be  granted;  (c) extend the time within
which  Options may be granted,  however,  this period  shall not exceed the term
provided in Section 5(c) hereof;  (d) amend the provisions of this Section 10 of
the Plan;  (e)  adversely  affect the  rights of any  Participant  (without  his
consent) under any Options  theretofore  granted;  (f) cause any award under the
Plan to cease to qualify for any applicable  exceptions to Section 162(m) of the
Code,  or (g) be effective  if  shareholder  approval is required by  applicable
statute, rule or regulation.

     11. Miscellaneous Provisions.

     (a) Rule 16b-3.  With respect to Participants  subject to Section 16 of the
Exchange  Act,  transactions  under this Plan are  intended  to comply  with all
applicable  provisions of Rule 16b-3. To the extent any provision of the Plan or
action by the Plan  administrators  fails to so comply,  it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Board.

     (b) Underscored  References.  The underscored  references  contained in the
Plan and in any Option  agreement  are included only for  convenience,  and they
shall  not be  construed  as a part of the Plan or  Option  agreement  or in any
respect affecting or modifying its provisions.

     (c) Number and Gender. The masculine, feminine and neuter, wherever used in
the Plan or in any  Option  agreement,  shall  refer to  either  the  masculine,
feminine or neuter and,  unless the context  otherwise  requires,  the  singular
shall include the plural and the plural the singular.

     (d) Governing Law. The place of  administration of the Plan and each Option
agreement  shall be in the State of New York. The corporate law of the Company's
state of incorporation  shall govern issues related to the validity and issuance
of  Shares.  Otherwise,  this Plan and each  Agreement  shall be  construed  and
administered  in  accordance  with the laws of the  State of New  York,  without
giving effect to principles relating to conflict of laws.

     (e) No  Employment  Contract.  Neither  the  adoption  of the  Plan nor any
benefit  granted  hereunder  shall  confer  upon any  Participant  any  right to
continued  employment or other  service with the Company,  nor shall the Plan or
any benefit  interfere in any way with the right of the Company to terminate any
Participant's employment or other service at any time.